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MERGERS AND ACQUISITIONS

By Jeff Spigel, Norm Armstrong and John Carroll

Merging competitors face a significant burden to show their contemplated merger would
benefit consumers, as federal antitrust regulators have met with success in arguing
that the parties can’t prove that a transaction’s benefits would actually be passed
on to consumers. Recent court opinions regarding the proposed merger of Anthem Inc.
and Cigna Corp. are the latest illustrations of the difficulties facing attorneys
seeking to prove the “efficiencies” of a proposed merger.

‘Efficiencies’
Weren’t Shown

On April 28, 2017, the U.S. Court of Appeals for the District of Columbia Circuit
upheld the decision by the U.S. District Court for the District of Columbia in February
that granted the Department of Justice’s, request for an injunction blocking Anthem’s
proposed $54 billion acquisition of Cigna. The DOJ also successfully challenged Aetna’s
proposed $37 billion acquisition of Humana in February, and the parties abandoned
that transaction.

Although the district court’s lengthy opinion in Anthem/Cigna addressed a number of
interesting antitrust and health care issues, including how to define the relevant
markets, competition in the sale of health insurance to “large group” employers, and
the fight between Anthem and Cigna over the merger agreement, the main focus of the
appeal was whether the district court erred in concluding that Anthem failed to show
that the merger would create substantial efficiencies sufficient to offset the alleged
anticompetitive effects of the merger.

Legal Framework

Courts and antitrust enforcement agencies evaluate a merger according to a number
of factors—including, for example, the market shares of the merging companies, whether
the companies are “close competitors,” and barriers to entry—to determine whether
the transaction would “substantially lessen competition” under the Clayton Act. This
analytical framework is laid out in the DOJ and Federal Trade Commission’s “Horizontal
Merger Guidelines,” which, though not technically law, explain how the agencies evaluate
mergers. The sources for this analysis include the documents and data from the merging
companies and competitors, the views of customers, and rigorous econometric modeling
of the merger’s possible effects.

Another key factor is efficiencies. Merging companies typically begin their defense
of the merger by describing all the “good” things the merger will do, such as generate
synergies and cost savings, and in the case of health-care mergers, improve clinical
quality, all of which the companies claim will be passed on to consumers. According
to the Horizontal Merger Guidelines, even if a merger would reduce competition, it
could still theoretically pass muster under the antitrust laws if it would create
substantial efficiencies that would benefit consumers.

It is not enough for merging companies to show all of the good things the merger would
do, however. They must demonstrate that the efficiencies are “merger-specific,”
meaning they could not be accomplished without the merger, and “verifiable,”
meaning they likely would occur. This is a difficult task for parties in all mergers,
as courts and DOJ and FTC staff tend to view these claims skeptically, and it has
been made more difficult by recent health care merger decisions, particularly the
D.C. Circuit Court’s decision in Anthem/Cigna.

The District Court Decision

In Anthem/Cigna, the parties claimed their merger would create billions of dollars
in efficiencies. They argued that national account customers alone would save over
$2 billion in medical expenditures because Cigna members would access Anthem’s more
favorable discounts with providers. Anthem also argued that the deal would generate
substantial general and administrative cost savings.

The district court dismissed these claims in an opinion authored by Judge Amy Jackson.
First, Judge Jackson disagreed with the parties’ arguments that potential provider
discounts are merger-specific, because the companies would not have to merge for customers
to access lower rates. Instead, customers could access them by simply switching to
the other company.

In addition, Anthem failed to show there was anything about the “mere combination
of the insurers’ two pools of patients that would enable doctors or hospitals to treat
patients more expeditiously or at a lower cost.”
The parties did not claim that the medical cost savings would be accomplished by streamlining
the parties’ operations or that any new products would result from the combination
of the parties’
resources or expertise. According to Judge Jackson, “The promised reduction in customers’
total medical costs does not result from either company doing anything better, or
from the carriers’
or the providers’ operating more efficiently, and there has been no showing that the
merger will result in increased output or enhanced quality at the same cost.”

Finally, Judge Jackson was skeptical that any savings would be passed on to consumers
because Anthem’s documents showed the company intended to capture the savings itself.
Specifically, the documents listed “pass all savings onto customers” as one of seven
potential options, and therefore the court held that there was little, if any, certainty
that consumers would actually benefit from the savings.

The Circuit Court Decision

In a 2-1 decision authored by Judge Judith Rogers, the D.C. Circuit held the district
court “did not abuse its discretion in enjoining the merger based on Anthem’s failure
to show the kind of extraordinary efficiencies necessary to offset the conceded anticompetitive
effect of the merger…” The court first pointed out that the government overwhelmingly
met its burden in establishing that the merger would create a highly concentrated
market and that Anthem’s appeal hinged on the district court’s treatment of its efficiencies
defense. The court declined to take a position as to whether an efficiencies defense
is available at all, stating, “The court should leave for another day whether efficiencies
can be an ultimate defense to Section 7 illegality,” and it rejected Anthem’s argument
that parties need not prove that efficiencies are verifiable and merger-specific,
citing precedent from the D.C. Circuit, as well as the Horizontal Merger Guidelines.

The D.C. Circuit held that the lower court was correct in rejecting Anthem’s argument
regarding merger specificity. Anthem argued that the merger would allow it to create
new, innovative products and lower costs, but the district court properly found that
Anthem’s inability to create better programs on its own stemmed from a “no frills
culture”
or “flawed marketing strategies” rather than any inherent difficulties that the merger
would overcome.

The court also agreed with the district court’s skepticism that Anthem could actually
achieve lower provider rates and other cost savings, thereby failing to show the efficiencies
are verifiable or likely to occur. First, such lower rates would have to be renegotiated,
which would require persuading large health systems to agree to lower rates. Furthermore,
Anthem likely already achieved “whatever economies of scale are available,” and therefore
adding Cigna would not create additional, meaningful cost savings.

Implications

Judges in other recent health-care merger decisions (for example, the Penn State
Hershey Medical Center/PinnacleHealth System merger) have articulated views similar
to those in the district and circuit court opinions in Anthem/Cigna, finding that
merging parties have not been able to validate their efficiency claims. And, notwithstanding
Judge Brett M. Kavanaugh’s dissenting opinion in Anthem/Cigna, there is skepticism
in the courts and agencies regarding the efficiencies defense in general.

At bottom, merging competitors face a significant burden, and an emboldened DOJ and
FTC, to show their contemplated merger would benefit consumers.

So how can merging parties establish a successful efficiencies defense? In the health-care
context, parties cannot simply point to whichever party does something better
(e.g., higher quality scores, lower purchasing costs) and argue that the lower performing
party would achieve these improvements as a result of the merger.

Rather, the parties should demonstrate with substantial evidence (i.e., documents
and data) that the merger is necessary to achieve the claimed efficiencies and that
the efficiencies are likely to occur. For example, if a high quality hospital is acquiring
a hospital with lower quality, it would be compelling if the buyer could point to
concrete examples of how it had improved quality at hospitals it had previously acquired.

Having a detailed implementation plan with specific financial and quality metrics
could also be persuasive to a court or agency. At bottom, if a transaction raises
competitive concerns, parties should plan their efficiencies arguments early and be
able to substantiate their claims with documents and data.

**********

Jeff Spigel is a partner in King & Spalding’s Washington, D.C., office and co-heads
the firm’s global antitrust practice. Mr. Spigel’s practice focuses on advising clients
with responding to civil and criminal antitrust investigations in the United States
and abroad, obtaining Hart-Scott-Rodino clearance and coordinating approvals in foreign
jurisdictions of proposed transactions, pursuing or defending against antitrust claims,
and counseling on strategic antitrust issues.

Norm Armstrong is a partner in King & Spalding's Washington D.C. office and co-heads
the firm’s global antitrust practice. Mr. Armstrong is a former Deputy Director of
the Federal Trade Commission’s Bureau of Competition, and his practice focuses on
representing foreign and domestic clients in a wide range of antitrust matters, including
antitrust litigation, complex transactions and antitrust counseling and government
civil and criminal investigations.

John Carroll is a counsel in the antitrust practice group in King & Spalding’s Washington,
D.C., office and a former FTC lawyer. Mr. Carroll's practice focuses on civil and
criminal antitrust matters, including mergers &
acquisitions, strategic counseling and compliance, and global cartel investigations,
where he represents clients before the Department of Justice Antitrust Division, Federal
Trade Commission, and international and state antitrust enforcement authorities.

The authors were involved in the Anthem/Cigna and Aetna/Humana merger litigations
on behalf of provider clients.

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